Is McClatchy Bid for Cowles Too Rich?

By IVER PETERSON

Published: November 17, 1997

When the sale of the Cowles Media Company was announced late Thursday, the surprise was not just the identity of the buyer, but the price.

McClatchy Newspapers Inc., a medium-sized chain that has recently grown much bigger, was certainly not among the heavy-hitters like the Tribune Company, the A. H. Belo Company or the Times Mirror Company -- companies at the center of the speculation as potential bidders for The Minneapolis Star Tribune, the Cowles Media flagship.

And the $1.4 billion largely cash deal was well above the $1 billion valuation that industry analysts on Wall Street had set for Cowles Media. As a result, Gary Pruitt, McClatchy's chairman and chief executive, had some explaining to do at a news conference in Minneapolis on Friday.

''Some analysts say we've paid too much,'' Mr. Pruitt said. ''I think they're wrong, and I will prove them wrong over time and I look forward to doing that.''

McClatchy already owns 10 daily and 13 weekly papers in California, Washington, Alaska, North and South Carolina, including its flagship, The Sacramento Bee, and The News and Observer in Raleigh, N.C., which it acquired for about $324 million two years ago.

The Star Tribune, whose paid circulation of 387,000 makes it the country's 16th-largest newspaper, will bring the McClatchy chain's total weekday circulation to more than a million.

The purchase of The Star Tribune, Mr. Pruitt said, strengthened the company's quest for a wider base in a cyclical industry. The necessity for diversity was driven home during the recent slump in retail advertising in California, which hurt the earnings of the company's papers in Sacramento, Fresno and Modesto.

''We view it as a rare opportunity to acquire a prime asset in one of the best newspaper markets in the country, with good demographics and good growth,'' Mr. Pruitt said in an interview Friday. ''At the same time it is a paper and a company with similar traditions to our own.''

Mr. Pruitt said that each newspaper's tone and editorial policy would be directed by its own publishers, not from edicts made in Sacramento. The Raleigh News and Observer, for example, has been a leader in the movement for what has been called civic journalism -- an effort by some editors to use a paper's news columns as a direct means to identify and solve local problems. The California papers of the McClatchy chain are not identified with civic journalism.

Mr. Pruitt said that in 1986, 90 percent of McClatchy's revenues came from its California properties, while in 1996 California revenues amounted to 50 percent of the total.

Too often, he pointed out, the country's highest growth areas lack the solid market and demographic qualities of cities like Minneapolis, which often have higher-income households and a higher level of newspaper readership than some of the faster-growing communities in the South and Southwest. ''Minneapolis is right in the cross hairs of those two most important elements for newspapers,'' he said.

In many ways -- besides the market considerations that Mr. Pruitt described -- the two companies fit well together. Like Cowles, McClatchy is a family company, founded during the California gold rush 150 years ago and still controlled by family stock trusts. Two senior family members of the board, the brothers James B. McClatchy and William Ellery McClatchy, along with two other members of the family, control several trusts holding more than 97 percent of the voting stock in the company.

McClatchy's owners did make one concession to the Cowles sensibilities: the company agreed to contribute at least $3 million a year for several years to Minneapolis nonprofit groups, extending the Cowles family's long history of philanthropy in the city.

There was no mystery about the Cowles family's reasons for wanting to sell. The heirs to John Cowles Sr. and his brother, Gardner Cowles Jr., who bought the old Minneapolis Star in 1935, now number about 70, and are ''increasingly fragmented and numerous,'' Elizabeth Ballantine, head of the controlling Cowles Family Trust, said. With each cousin demanding a more concrete share of the family patrimony than Cowles's thinly traded stock, pressure to cash out had become irresistible.

Clearly, said Peter Appert, an industry analyst with BT Alex Brown Inc., the heirs got a good price.

''It's an extremely full valuation,'' Mr. Appert said. ''I was thinking that the price would be in the neighborhood of $1 billion or a little more, but a billion-four seems quite generous, and the implication for McClatchy is that the market doesn't like the magnitude of the earnings dilution.''

Indeed, the market punished McClatchy for its generosity, driving its stock down 14 percent -- a drop of $4.625 -- to close at $28 a share Friday.

McClatchy will pay $90.50 a share in cash for at least 75 percent and at most 85 percent of Cowles shares. The unsold shares will be exchanged at a rate of $90.50 each for McClatchy stock. A seat on the McClatchy board will be awarded to a member of the Cowles family as part of the deal.